Federal bankruptcy Judge Steven Rhodes ruled Tuesday that Detroit could formally enter bankruptcy, and the widely held belief that pensions were protected under Michigan’s Constitution was shattered. Under Chapter 9 of the U.S. Bankruptcy Code, state residents believed that public-sector pensions were protected by the state’s constitution; however, as Rhodes said, “pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy.” This ruling puts not only the well being of retired Detroit employees at risk, but also the protected pensions across the country.

“This is one of the strongest protected pension obligations in the country here in Michigan … If this ruling is upheld, this is the canary in a coal mine for protected pension benefits across the country. They’re gone,” said Bruce Babiarz, a spokesman for the Detroit Police and Fire Retirement System. So, while Detroit’s bankruptcy gained notoriety with reports that the city would consider selling the Detroit Institute of Art’s collection, the implications of this ruling have much more far-reaching impact. Now, Emergency Manager Kevyn Orr will be able to eliminate the city’s pension obligations to its retirees. Rhodes did say that the city should be “fair and equitable” as it decides if and by how much pensions should be reduced. However, any substantial cuts could be devastating to pensioners. Amru Meah, a pensioner who worked for the city for 32 years, said the pension is “going to affect me greatly. A big pension cut may force me to file for bankruptcy. I can’t afford to take a pay cut.” Although it’s unlikely the city will be able to resolve its debts without affecting its legacy obligations, Orr should make every effort to structure the cuts to be as minimal as possible.

The cuts will affect Detroit’s 23,500 retirees, even though they previously believed they would be receiving their full pension as it is in the Michigan Constitution. However, there are various other options as to where these pension cuts may come from. There are options that won’t hurt Detroit’s oldest and poorest retirees and instead, will instead take cuts from the future pensions of Detroit’s active workers or will impose smaller cuts on the city’s retired police and firelighters.

By ruling in favor of the U.S. constitution’s supremacy clause over the state constitution’s protection of pension, other struggling American cities and states may follow suit and not guarantee the protection of pensions for retirees. Cities that struggle with the rising cost of pensions and funding of public school and public safety departments — such as Chicago, Los Angeles and Philadelphia — may now take this option into consideration. In cities and states that are dealing with unfunded pension liabilities, public-sector retirees may lose the obligations made by their state in the wake of a Chapter 9 bankruptcy.

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